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Optimal fiscal policy and sovereign debt crises

Niemann, Stefan and Pichler, Paul (2020) 'Optimal fiscal policy and sovereign debt crises.' Review of Economic Dynamics, 37. pp. 234-254. ISSN 1094-2025

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Abstract

This paper studies how sovereign risk – both fundamental and self-fulfilling – shapes the cyclical behavior of optimal fiscal policy. We develop a model with endogenous default costs where market sentiment can induce belief-driven debt rollover crises. Optimal taxes and public spending are generally procyclical, but the incidence of rollover risk gives rise to infrequent episodes of severely countercyclical fiscal activity. These endogenous regime changes are associated with pronounced countercyclical changes in the level of debt. Debt buildups are triggered already by relatively mild recessions, but successful fiscal consolidations occur only in exceptionally good times.

Item Type: Article
Uncontrolled Keywords: Fiscal policy; Sovereign debt; Rollover crises; Regime switches
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Economics, Department of
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 19 Mar 2020 12:34
Last Modified: 06 Jan 2022 14:11
URI: http://repository.essex.ac.uk/id/eprint/27139

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